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State Tax Policies Vary Widely on Nexus, Sourcing

May 19th 2016
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It likely comes as no surprise that state taxation is a fuzzy area in corporate income and sales and use taxes for US companies, and Bloomberg BNA’s 16th annual Survey of State Tax Departments dishes up a variety of findings, especially focusing on nexus policies.

For starters, here are four in the nexus category that will grab attention:

  • This year, only five states – Delaware, Hawaii, Massachusetts, Pennsylvania, and Texas – apply Quill in making income tax nexus determinations. Tennessee indicated they stopped applying Quill in 2016.
  • Twenty states reported that an out-of-state corporation’s employees who fly into the state on a commercial airline for business one to four times a year is enough to create nexus. Florida indicated that nexus would only be created if the activity occurred five or more times in a year.
  • In a nod to the growing concern about remote sales activity, 14 states indicated that an out-of-state company that makes remote sales into the state and uses a contract carrier to deliver goods there would create nexus and face sales taxes for an out-of-state corporation.
  • Thirty-four states indicated that making a sale or accepting orders at a trade show was enough to create sales tax nexus. Thirty-six states noted that making sales while in the state for three or fewer days is enough to create nexus.

“Given the growing need for revenue, states are increasingly looking for new and unique ways to tax businesses,” George Farrah, editorial director of Bloomberg BNA Tax & Accounting, said in a written statement. “This survey provides perspectives directly from US state tax departments – the information businesses and tax practitioners need to navigate an ever-changing state tax landscape.”

All 50 states and the District of Columbia participated in the survey.

Here’s a sampling of other findings:

Sourcing. States were asked this year to identify the method used to source receipts from cloud computing or software as a service (SaaS). Eighteen said they use market-based sourcing, eight use cost of performance, and three use a method other than those two.

Almost all states said the sourcing method would be the same for a partnership owned by individuals or a corporation.

In addition, 17 states have special industry sourcing rules for receipts from television and radio broadcasting, while 15 states say they have special industry sourcing rules for oil and gas pipelines, compared to 17 states that do not.

Pass-through entities. Pass-through entities are required in 25 states to apportion income using the same apportionment rules used by corporations. Five states said they require pass-through entities to use apportionment rules specific to pass-throughs.

Federal adjustments. When asked about policies for reporting federal changes to the states, 23 states said that adequate notice for starting the states’ statute of limitations occurs only when taxpayers file an amended return. Ten states said the notice is imputed to the state when the IRS or other jurisdiction gives information to the agency.

Most states reported that changes by other governments (including foreign) would not be considered a reportable adjustment after the state’s statute of limitations expired.

Sales tax refunds and qui tam cases. Vendors that get a sales tax refund have to refund the tax to their buyers in 30 states. Four states require the refund to be made to buyers before vendors can request a state refund.

Three states (Maine, Nevada, and Rhode Island) have a false claims law in which a private party acting as relator on behalf of the state may sue a taxpayer for underpaying tax.

Six states have a consumer protection law that allows buyers to bring class-action lawsuits against vendors for overcollection of sales or use taxes.

Related article:

The Truth About Sales Tax Nexus

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